(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Compensation Proposals May Not Be Omitted from Company Proxy Statements

SEC Chairman William Donaldson has said that in making compensation decisions, boards and compensation committees must focus above all on long-term performance. The Division of Corporation Finance is evaluating executive compensation disclosure under the current rules to determine whether to recommend improvements. Shareholders have sought changes to executive compensation by submitting proposals for inclusion in companies' proxy statements. Wal-Mart Stores, Inc. received two such proposals and sought a no-action letter from the staff to omit them from its proxy materials, but in both cases the relief was denied.

The Sheet Metal Workers National Pension Fund proposed a common sense executive compensation framework, the goal of which is to encourage executive compensation policies and practices that promote long-term corporate value growth. With CEO-worker pay ratios as high as 300-to-1, the Fund explained that the framework emphasizes the need for limits on senior executive retirement and severance benefits. Wal-Mart sought to omit the proposal on the basis that it was vague and potentially misleading. The company also maintained that it has substantially implemented the proposal. The staff advised that it was unable to concur with either of those bases for omitting the proposal.

The American Federation of Labor and Congress of Industrial Organizations asked Wal-Mart to adopt a policy that a significant portion of future equity compensation grants to senior executives be in shares that vest upon the achievement of performance goals. Wal-Mart sought to omit the proposal on the basis that it had been substantially implemented, pointing to the adoption of a new compensation practice of awarding performance shares that constitute a significant portion of all equity-based compensation.

The company's compensation, nominating and governance committee awarded three cycles of an equal amount of performance shares, according to Wal-Mart. The first cycle of performance shares awarded to executive officers represents approximately one-third of each officer's equity-based compensation package when taking into consideration the Black-Scholes value of the stock options awarded and the current value of restricted shares that were awarded in January 2005, Wal-Mart explained. The performance shares are tied to Wal-Mart's stock price and may be paid out in cash, shares or a combination of both. The first cycle of performance shares will vest on January 31, 2006, only if the company reaches a pre-established return on investment and revenue growth rates. The second and third cycles will vest in 2007 and 2008 upon reaching or exceeding the pre-established goals.

The AFL-CIO disagreed with Wal-Mart's view that its proposal had substantially been implemented, noting that the three cycles represented the first and only time that performance shares have been granted to senior executives in recent history. This three-cycle grant is a practice, not a policy, according to the AFL-CIO, and there is no guarantee it will continue beyond the three-cycle grant. The staff again advised that it was unable to concur with Wal-Mart's view that the proposal had been substantially implemented, so the proposal could not be omitted from the company's proxy material in reliance on that exception.

A Delta Air Lines shareholder used a different approach to what he viewed as excessive executive compensation. He submitted a proposal asking the board to renegotiate the 2002 retention program that provided awards to members of management who continued their employment after the September 11, 2001, terrorist attacks to address the extraordinary challenges the company would face. The shareholder questioned whether the executives were effective in responding to these extraordinary challenges, given that Delta lost $5.6 billion over the last three years and is burdened by a $21 billion debt. What performance goals could they have reached by leaving Delta in such a dire financial predicament, he asked?

Many of the executives were employed for a limited time with Delta, did a very poor job and were rewarded handsomely for their poor performance, according to the shareholder. He explained that his proposal simply asks the former leaders to participate in the company's financial hardship.

Delta sought no-action relief to omit the proposal on the basis that it could not alter the terms of a fully executed contract and that doing so would violate Georgia law. Delta also claimed that the proposal was materially false and misleading and thereby violated the proxy rules. The staff was unable to concur with any of these bases for omitting the proposal and advised that Delta could not rely on the proxy rule exceptions for doing so.